Wall Street's biggest lobbying groups banded together to sue theCommodity Futures Trading Commission (CFTC), seeking to curb theoverseas reach of its rules and rein in a regulatory barrage by itsdeparting Chairman Gary Gensler.

The suit, filed yesterday in federal court in Washington, seeksto overturn guidance the CFTC approved in July. The trade associations,which represent Goldman Sachs Group Inc., JPMorgan Chase & Co.,Deutsche Bank AG, and other swap dealers, say the agency illegallyset regulations by issuing guidance documents and staff advisoriesrather than formal commission-approved rules.

In their court papers and in interviews, the groups said theyfelt pushed to the edge by Gensler, who has spent the past fiveyears grappling with banks over the parameters of a more publicmarketplace for financial products that helped ignite the 2008credit crisis.

The policies have been championed by “a single individual in asingle agency by what amounts to individual fiat,” said Judd Gregg,chief executive officer of the Securities Industry and FinancialMarkets Association (Sifma), one of the organizations that broughtthe case. “You can't allow that sort of precedent to stand,” Greggsaid in an interview yesterday.

The industry decided to go to court as a “last resort,” to end a“very disruptive process which is outside the rule of law,” hesaid.

Gensler defended the CFTC's policies, saying the overseasguidance was released appropriately. “I feel very good about whatwe did,” Gensler said today in an interview on NPR's “On Point”radio program. “It's not surprising that there are challenges herebecause there is a lot of money at stake.”

The lawsuit—filed by Sifma along with the International Swapsand Derivatives Association and the Institute of InternationalBankers—is the latest in a series of Wall Street challenges to U.S.efforts to reshape financial regulation after the worst economiccollapse since the Great Depression. The 2010 Dodd-Frank Act gavethe CFTC power to bring swaps, which have been traded behind closeddoors for decades, under U.S. oversight for the first time.

The question of how to apply the new regulations overseas hasbeen among the most contentious issues in the battle between thebanks and Gensler, a former Goldman Sachs partner, over the $693trillion global derivatives market.

The biggest banks conduct at least half their swaps businesswith overseas clients, according to some estimates. Gensler hasfought to extend his agency's authority into foreign transactions,pointing out that several major financial failures, including thecollapse of American International Group Inc., originated inoverseas units.

The CFTC first approved the guidelines for overseas swaps inJuly. In November the agency issued two staff opinions to clarifythe scope of the guidelines.

Foreign Swaps Rules May Slow

The lawsuit focuses on the often arcane way that agencies setpolicy. Formal agency rules require cost-benefit analysis and votesby commissioners, who are picked by the president and confirmed bythe Senate. The guidance document in July, which was approved in acommission vote, lacked economic analysis. The advisories inNovember lacked both economic analysis and a formal vote.

The November documents “turned on its head assumptions themarket had been making,” ISDA Chairman Stephen O'Connor said in aninterview.

While the groups asked the court to vacate the CFTC policy, thecase could have the practical effect of slowing the foreign tradingrules.

According to one person briefed on the ISDA board meeting whenthe suit was authorized last month, the association's attorneyssaid they would consider it a victory if the guidance was delayedfor a year.

The person, who asked for anonymity because the meeting wasprivate, said ISDA Chief Executive Officer Robert Pickel told theboard that while there was a potential the case would push the CFTCto take an even stronger stance against Wall Street, joining theother trade groups would highlight the strength of theopposition.

Pickel declined to comment on what he said at the meeting.

The trade associations hired Gibson, Dunn & Crutcher LLPpartner Eugene Scalia, who specializes in challenging regulationsand has won cases involving Dodd-Frank rules issued by the CFTC andthe Securities and Exchange Commission (SEC).

Rulemaking Rules

The agency's use of guidance and staff advisories violatedfederal laws that lay out requirements for rulemaking, includingperforming an analysis of the costs and benefits, the groups saidin their lawsuit.

“The commission attempted to excuse itself from thoserequirements by issuing a sweeping, international compliancedirective that it characterized as mere guidance,” they said.

The industry also argued that the November advisoriesfundamentally changed the policy the CFTC released inJuly—guidelines they said they had already bent over backward tofollow.

The July policy contained a footnote, number 513, that banks were relying on to keep swapdeals off electronic platforms and away from the agency's rules.The Nov. 14 advisory was published after Bloomberg News reported onthe banks' use of the footnote loophole.

The advisory explained that traders based in the U.S. whoarrange, negotiate, or execute a deal—even on behalf of an overseasaffiliate—must comply with Dodd-Frank.

Gensler's move in November drew support from Senator Carl Levin,a Michigan Democrat who has investigated Wall Street tradingpractices. He said the advisories were necessary to close off an“offshore gimmick” banks used to evade oversight.

Republican lawmakers have been critical of Gensler's effort.

“This lawsuit comes in direct response to Chairman Gensler'sdecision to ignore the rule of law and disregard long- establishedprocedures at the CFTC for adopting new rules,” RepresentativeFrank D. Lucas, an Oklahoma Republican and chairman of the Housecommittee that oversees CFTC, said in a statement yesterday.

The banks say they are concerned that, along with its potentialto disrupt current deals, the language in the opinion is so broadthat it could expose overseas trades to even more regulation. Theyalso said the advisory went against a deal Gensler cut with EUregulators to divide up swaps oversight abroad.

EU 'Surprised'

Michel Barnier, the European Union's financial services chief,expressed reservations about the CFTC's moves last month. Hisspokeswoman, Chantal Hughes, said Nov. 20 that “we were verysurprised by the latest CFTC rules, which seem to us to go againstboth the letter and spirit” of the division of oversight agreementGensler hammered out with the EU in July.

Bloomberg LP, parent of Bloomberg News, operates a tradingplatform known as a Swap Execution Facility and unsuccessfully suedthe CFTC on different rules.

The case is SIFMA v. U.S. CFTC, 13-cv-1916, U.S. District Court,District of Columbia (Washington).

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